Narayanrao's widow, Gangabai, gave birth to a posthumous son, who was legal heir to the throne. The newborn infant was named 'Sawai' Madhavrao (Sawai means "One and a Quarter"). Twelve Maratha chiefs, led by Nana Phadnavis directed an effort to name the infant as the new Peshwa and rule under him as regents.

Raghunathrao, unwilling to give up his position of power, sought help from the British at Bombay and signed the Treaty of Surat on 6 March 1775. According to the treaty, Raghunathrao ceded the territories of Salsette and Bassein to the British, along with part of the revenues from Surat and Bharuch districts. In return, the British promised to provide Raghunathrao with 2,500 soldiers.

The British Calcutta Council condemned the Treaty of Surat, sending Colonel Upton to Pune to annul it and make a new treaty with the regency. The Treaty of Purandhar (1 March 1776) annulled that of Surat, Raghunathrao was pensioned and his cause abandoned, but the revenues of Salsette and Broach districts were retained by the British. The Bombay government rejected this new treaty and gave refuge to Raghunathrao. In 1777 Nana Phadnavis violated the treaty with the Calcutta Council by granting the French a port on the west coast. The British replied by sending a force towards Pune. The tangle was increased by the support of the London authorities for Bombay, which in 1778–79 again supported Raghunathrao. Peace was finally restored in 1782.

The East India Company's force from Bombay consisted of about 3,900 men (about 600 Europeans, the rest Asian) accompanied by many thousands of servants and specialist workers. They were joined on the way by Raghunath's forces, adding several thousand more soldiers, and more artillery. The Maratha army included forces contributed by all the partners in the federation, tens of thousands in all, commanded by Tukojirao Holkar and GeneralMahadji Shinde (also known as Mahadji Sindia).

Mahadji slowed down the British march and sent forces west to cut off its supply lines. When they found out about this, the British halted at Talegaon, a few hours' brisk march from Pune, but days away for the thousands of support staff with their ox-drawn carts. Now the Marathacavalry harassed the enemy from all sides. The Marathas also utilized a scorched earth policy, burning farmland and poisoning wells.

The British began to withdraw from Talegaon in the middle of the night, but the Marathas attacked, forcing them to halt in the village of Wadgaon (now called Vadgaon or Vadgaon Maval), where the British force was surrounded on 12 January 1779. By the end of the next day, the British were ready to discuss surrender terms, and on 16 January signed the Treaty of Wadgaon that forced the Bombay government to relinquish all territories acquired by the Bombay office of the East India Company since 1773.[3]

Reinforcements from northern India, commanded by Colonel (later General) Thomas Wyndham Goddard, arrived too late to save the Bombay force. The British Governor-General in Bengal, Warren Hastings, rejected the treaty on the grounds that the Bombay officials had no legal power to sign it, and ordered Goddard to secure British interests in the area.

Goddard with 6,000 troops stormed Bhadra Fort and captured Ahmedabad on February 15, 1779. There was a garrison of 6,000 Arab and Sindhi infantry and 2,000 horses. Losses in the fight totalled 108, including two Britons.[4][5][6] Goddard also captured Bassein on December 11, 1780. Another Bengal detachment led by Captain Popham captured Gwalior and assisted by the Rana of Gohad, captured Gwalior on August 4, 1780, before Mahadji Scindia could make preparations. Skirmishes took place between Mahadji Scindia and General Goddard in Gujarat, but indecisively. Hastings sent yet another force to harass Mahadji Shinde, commanded by Major Camac.[7]

After capturing Bassein, Goddard marched towards Pune. But he was routed at Borghat – Parshurambha in April 1781 by Haripant Phadke and Tukoji Holkar.

In central India, Mahadji stationed himself at Malwa to challenge Camac. Initially, Mahadji had an upper hand and British forces under Camac, being harassed and reduced, had to retreat to Hadur.[8]

In February 1781 the British beat Shinde to the town of Sipri,[9] but every move they made after that was shadowed by his much larger army, and their supplies were cut off, until they made a desperate night raid in late March, capturing not only supplies, but even guns and elephants.[10] Thereafter, the military threat from Shinde's forces to the British was much reduced.

The contest was equally balanced now. Where Mahadji scored a significant victory over Camac at Sironj,[11] the latter avenged the loss through the Battle of Durdah[12] on March 24, 1781.

Colonel Murre arrived with fresh forces in April, 1781 to assist Popham and Camac. After his defeat at Sipri, Mahadji Scindia got alarmed. Finally, he decisively crushed the forces of Murre on July 1, 1781. Mahadji seemed to be too powerful to be defeated now.

At the same time the British invasion on Konkan was thoroughly defeated.

This treaty, known as the Treaty of Salbai, was signed on 17 May 1782, and was ratified by Hastings in June 1782 and by Phadnis in February 1783. The treaty also returned to Shinde all his territories west of the Yamuna.

It also guaranteed peace between the two sides for twenty years, thus ending the war. (Salbai is located 32 km south-east to Gwalior city in Gwalior district, MP)